Economic Surplus Measurement in Multi-Market Models

Despite continuing controversy, economic surplus concepts have continued to be used in empirical cost-benefit analyses as measures of welfare to producers and consumers. In this paper, the issue of measuring changes in producer and consumer surplus resulting from exogenous supply or demand shifts in multi-market models is examined using a two-input and two-output equilibrium displacement model. When markets are related through both demand and supply, it is shown that significant errors are possible when conventional economic surplus areas are used incorrectly. The economic surplus change to producers or consumers should be measured sequentially in the two markets and then added up.